The State Of REITs: September 2021 Edition
Summary
- REITs continue to achieve positive total returns in every single month of 2021 with +0.87% average return in August.
- Large cap REITs (+2.3%) continued to outperform their smaller peers in August. Micro caps (-2.49%) underperformed again.
- Nearly three fifths (59.44%) of REIT securities had a positive total return in August.
- Corrections and Self Storage REITs outperformed all property types in August, while Office and Health Care REITs saw the deepest declines.
- The average NAV premium decreased to 0.39%, but the median premium increased to 1.68%.
- This idea was discussed in more depth with members of my private investing community, Portfolio Income Solutions. Learn More »
REIT Performance
REITs extended their 2021 winning streak to 8 months with another +0.87% average total return in August. REITs fell short of the broader market, however, as the NASDAQ (+4%), S&P 500 (+2.9%), the Dow Jones Industrial Average (+1.22%) all achieved larger gains in August. The market cap weighted Vanguard Real Estate ETF (VNQ) outpaced the average REIT again in August (2.15% vs. +0.87%) and has now surpassed the YTD performance of the average REIT (29.5% vs. +28.59%). The spread between the 2021 FFO multiples of large cap REITs (25.7x) and small cap REITs (16.4x) narrowed in August as multiples fell 0.5 turns for large caps and only fell 0.1 turns for small caps. In this monthly publication, I will provide REIT data on numerous metrics to help readers identify which property types and individual securities currently offer the best opportunities to achieve their investment goals.
Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article
Large cap REITs (+2.3%) continued their strong run in August, surging further ahead of their smaller peers. Micro cap REITs (-2.49%) continued to give up more of their strong gains from earlier in the year. Small caps (+1.36%) had a strong month, overtaking micro cap REITs' YTD average total return. Large cap REITs (+34.42%) have thus far in 2021 outperformed small caps (+30.02%) by more than 400 basis points.
Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article.
15 out of 20 Property Types Yielded Positive Total Returns in August
75% of REIT property types averaged a positive total return in August, with a 16.3% total return spread between the best and worst performing property types. Office (-4.31%) and Health Care (-4.27%) badly underperformed in August and are now, respectively, the 2nd and 3rd worst performing property types YTD. With the delta variant of Covid-19 driving increased risk of further government lockdowns or other measures that will restrict normal business operations, sentiment has begun to sour on property types that are more sensitive to such government actions.
Corrections (+11.99%) and Self Storage (+6.00%) led all property types in August. GEO Group (GEO) posted a strong earnings beat in August as the corrections REIT continues to demonstrate strong cash flow despite open hostility to the private prison industry by the Biden administration and congressional Democrats. There remains tremendous (and potentially existential) risk for GEO in this current political climate, but thus far, GEO is managing to weather the storm fairly well by keeping operating costs low and maintaining strong occupancies in their U.S. Marshals Service and ICE facilities.
Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article
Malls (+63.67%), Self Storage (+54.56%) and Shopping Centers (+49.75%) have outperformed all other property types over the first 8 months of the year. Despite a very strong August, Corrections remains the only REIT property type in the red year to date (-9.91%). The selloff of Health Care REITs in August sunk the property type down to only a single-digit average gain in 2021 (9.55%).
Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article
The REIT sector as a whole saw the average P/FFO (2021) rise 0.2 turns in August (from 18.5x up to 18.7x). The average FFO multiples rose for 65%, declined for 25% and held steady for 5% of property types in August. There are no recent 2021 FFO/share estimates for either of the Advertising REITs. Land (47.2x), Manufactured Housing (31.3x) and Industrial (30.4x) currently trade at the highest multiples. The Corrections (3.8x) multiple expanded by 0.4 turns in August, but remains lower than all other property types. Hotel (4.3x) and Mall (5.2x) REITs are the only other property types still trading at a single-digit multiple.
Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article.
Performance of Individual Securities
QTS Realty Trust (QTS) was acquired by Blackstone (BX) on August 31st for $78/share. This acquisition provides Blackstone with high-quality hyperscale and hybrid-colocation properties, expanding their data center portfolio.
New York City REIT (NYC) suffered the greatest losses of any REIT in August sinking -30.88%. While both the REIT sector and broader stock market have performed very well over the past year, NYC has continuously struggled, falling from $17.60/share at NYSE listing on 08/18/2020 to only $9.22/share on 08/31/2021. The office REIT’s price fell sharply in August after another disappointing earnings release showed negative FFO/share and declining revenue.
City Office REIT (CIO) was the best performing REIT in August with a +24.09% gain. CIO’s share price surged on the announcement of the sale of their Sorrento Mesa portfolio for $576M. As there is no debt encumbering any of the properties being sold, net proceeds from the sale are $546M or about $12.38/share. That may not be an enormous amount of money for a large cap REIT, but for a small cap REIT that was only trading at $12.90 at the time of the announcement, it demonstrated that CIO had been trading far below fair value.
59.44% of REITs had a positive return in August with 87.91% in the black year to date. During the first eight months of last year, the average REIT had a painful -22.00% return, whereas this year, the average REIT has seen a remarkable total return of +28.59%.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
Dividend Yield
Dividend yield is an important component of a REIT's total return. The particularly high dividend yields of the REIT sector are, for many investors, the primary reason for investment in this sector. As many REITs are currently trading at share prices well below their NAV, yields are currently quite high for many REITs within the sector. Although a particularly high yield for a REIT may sometimes reflect a disproportionately high risk, there exist opportunities in some cases to capitalize on dividend yields that are sufficiently attractive to justify the underlying risks of the investment. I have included below a table ranking equity REITs from highest dividend yield (as of 08/31/2021) to lowest dividend yield.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
Although a REIT’s decision regarding whether to pay a quarterly dividend or a monthly dividend does not reflect on the quality of the company’s fundamentals or operations, a monthly dividend allows for a smoother cash flow to the investor. Below is a list of equity REITs that pay monthly dividends ranked from highest yield to lowest yield.
Valuation
REIT Premium/Discount to NAV by Property Type
Below is a downloadable data table, which ranks REITs within each property type from the largest discount to the largest premium to NAV. The consensus NAV used for this table is the average of analyst NAV estimates for each REIT. Both the NAV and the share price will change over time, so I will continue to include this table in upcoming issues of The State of REITs with updated consensus NAV estimates for each REIT for which such an estimate is available.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
Takeaway
The large cap REIT premium (relative to small cap REITs) significantly increased during 2019 and further expanded during 2020. However, it has narrowed during 2021. Investors are now paying on average almost 57% more for each dollar of 2021 FFO/share to buy large cap REITs than small cap REITs (25.7x/16.4x - 1 = 56.7%). As can be seen in the table below, there is presently a strong, positive correlation between market cap and FFO multiple.
The table below shows the average premium/discount of REITs of each market cap bucket. This data, much like the data for price/FFO, shows a strong, positive correlation between market cap and Price/NAV. The average large cap REIT (+14.14%) trades at a double-digit premium to consensus NAV and mid cap REITs (+3.56%) on average trade at single-digit premiums. Small cap REITs (-9.54%) trade at a modest discount, whereas micro caps on average still trade far below their respective NAVs (-24.44%).
As the country recovers from the economic damage that resulted from the government-imposed lockdowns of 2020, same-store NOI is bouncing back as well. Those sectors that were most negatively impacted are now seeing the greatest SS-NOI gains due to highly favorable comps from last year. Retail is experiencing the greatest SS-NOI growth, but remains below pre-Covid levels. Self storage is seeing enormous SS-NOI growth despite not having nearly as favorable comps. Health Care, however, is alone in seeing an SS-NOI decline from Q2 2020.
The biggest SS-NOI gains in Q2 2021 were nearly all from retail REITs, led by Tanger Factory Outlet Centers (SKT) with a remarkable 87.6% SS-NOI growth year over year. The biggest declines were mostly from Health Care and Office REITs, although a couple of Multifamily REITs saw painful declines as well. By far, the largest year-over-year decline was from Diversified Healthcare Trust (DHC), whose SS-NOI plummeted 23.7%.
As can be seen in the graph above, median SS-NOI grown tends to decline more than same-store occupancy does in downturns. However, the magnitude of this difference during the Covid-19 lockdown recession was staggering. Occupancy only modestly declined, but SS-NOI growth turned sharply negative as landlords were able to retain most tenants, but those tenants in many cases either couldn’t or wouldn’t pay rent while locked down. Both median SS-NOI growth and occupancy rates came surging back as the economy reopened. The next few quarters will continue to offer favorable comps for most REITs, so SS-NOI growth should remain elevated through at least the end of Q1 2022. This may help to fuel continued strong returns for the REIT sector over upcoming quarters.
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This article was written by
Simon Bowler is the Chief Communications Officer at 2nd Market Capital Advisory Corporation, a Wisconsin-registered investment advisor specializing in the analysis and trading of real estate securities. Simon and his team are fiduciaries with over 50 years of collective experience as professional REIT analysts and asset managers.
They lead the investing group Portfolio Income Solutions where they convey REIT investment ideas through access to their actively managed portfolio, continuously updated spreadsheets, and extensive analysis. Stock selections in Portfolio Income Solutions utilizes discount to fair value, price dislocations, and arbitrages to achieve enhanced return potential. Learn more.Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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